Real Money

Greenberg: Clean Harbors Is Not Cleaning Up

The company trades like its former self, but for how long?

It has become so unpredictable that Credit Suisse analyst Hamzah Mazari, who originally upgraded the stock in 2010, veered from the pack earlier this week and downgraded Clean Harbors to a Neutral. He called management's credibility with guidance "low," and said that as the company has become more cyclical, it faces "a higher risk of missing expectations." Anything short of that, he said, would require "flawless execution."

What Went Wrong?

In a nutshell: bad timing and even worse luck. If it weren't so serious, it could be considered a comedy of errors. (See our chronology of events for more.) Clean Harbors dove head first into the oil-and-gas industry, notably in shale areas, with a variety of services, just as natural gas prices were collapsing.

Source: U.S. Energy Information Administration

As gas prices fell, so did the demand for oil and the oil rig count in the U.S. -- and so did the need for Clean Harbor's services, which include oilfield related disposal and transportation. The company attempted to reposition itself in an effort to expand its customer base, moving into new oil producing regions -- from the Marcellus to Bakken -- looking for the kind of success it has had in Canada's oil sands.

Adding insult to injury, the Safety-Kleen acquisition was completed just as base oil prices tumbled. Base oil is the kind oil Safety-Kleen re-refines and sells. Typically it tracks crude. But just after the acquisition was announced there were three price declines in base oil, McKim says, "and when I talked to people at Safety-Kleen they said this was unprecedented. They said they had never seen it and that it will be temporary."

But the spread between crude and base oil, while narrowing a bit, remains wide. In retrospect, McKim says, "We bought Safety-Kleen and paid a lot of money and probably bought at the top. Who would've had a crystal ball on what would happen to the spread between crude and base oil."

McKim, who founded Clean Harbors 34 years ago, still believes the strategy will pay off. The company even bought another re-refiner recently, even though Chevron ( CVX) is expanding its re-refining capacity.

Still, he said he sees margins improving, which they did last quarter, "because of the new markets we're going into."

As a silver lining of low natural gas prices, manufacturing in the U.S. is seeing a resurgence.